The Rise of Carve-outs, 6 Steps to Greater Value
With so much uncertainty and change across global economies and financial markets, coupled with increased shareholder activism and focused competition, corporates are under immense pressure to increase returns, according to leading global law firm Baker McKenzie. This is causing companies to re-examine their business models and to identify areas of the business where there is no longer a strategic fit, with a view to divesting them via a carve-out.
There is no doubt that carve-outs are becoming more prominent as a way for corporates to unlock value from their non-core enterprises, with them currently accounting for 10% of all M&A activity globally.
In the UK, from analysis undertaken by Baker McKenzie, almost 20% of FTSE 100 companies, with a market cap exceeding £453 billion, have issued profit warnings in 2016, making them ripe for restructure and divestment.
Carve-outs are particularly attractive for private equity (PE) firms, especially across Europe, where there are opportunities for them rapidly to build a portfolio and, in the process, pick up specific assets.
- The proportion of carve-out deals, where the buyer is a financial institution (such as a PE investor) has more than doubled since 2009 rising from 10% that year to 23% in 2016.
- 90 of the largest carve-out deals between 2012-2016 involved 50 or more jurisdictions.
- Carve-outs tend to follow the economic cycle with companies using tactical divestments to restructure and weather the economic storm. 2009-2014 saw an increase in divestments by US firms. However, last year saw a dip in the number but an increase (in percentage terms) of deals in the Middle East, Africa and Latin America, reflecting increased restructuring in those geographies.
- The general trend is towards an increasing number of carve-outs as a percentage of all divestments, as particularly seen in the consumer, EMI, pharma, industrials and materials sectors.
Planning your carve-out
Over the past four years, Baker McKenzie has worked on 149 carve-outs valued at $100 million or above with many being multi-billion dollar deals. This has enabled us to develop strategies that avoid loss of value, together with steps you can take to create the right circumstances for success:
- Sellers, think like your buyer: although you may not see a future for a particular asset in your company, to generate serious buyer interest and the highest price, you need to identify how other owners may value it differently.
- Buyers, focus on what you want and protect it: as a prospective buyer you will probably know the price you are willing to pay for the asset, as well as your objectives for the deal. However, you may not have included other factors, such as making the most of vendor due diligence to avoid repetition and the speed at which you can complete the deal, both of which could affect the price.
- Design a deal structure: there is always an acquisition structure that suits both the buyer and seller. The ideal structure will maximise the value for you and the other party, whether you are the buyer or seller. It will also minimise business disruption through the separation process.
- Focus on the details with a team that knows the local market: whether you are the buyer or seller, unforeseen delays will be costly. Small, local issues can turn out to be material to the deal, or they can change the structure of the transaction.
- Plan your HR strategy: HR should be strategic, not tactical. HR issues are sometimes left until the implementation stage, rather than addressed when the deal team plans its strategy.
- Put everything together: you want to get the best price for your assets. It’s important to you that your buyer and other stakeholders are confident in the process and not surprised as the transaction progresses. Good planning is key to creating this confidence.
Tim Gee, London M&A partner, Baker McKenzie said: "Post the financial crisis carve-outs have become increasingly more common as large companies reassess their businesses, letting go of non-core units to focus on activities key to their strategy.
"With careful planning, carve-outs are seen by global businesses as a preferred route to unlocking value. For them to be a success, you need a deep understanding of local law, competition and tax requirements in multiple jurisdictions globally."